What's behind the Wii shortage?

Nintendo recently warned consumers of very likely shortages of the Wii for this holiday season. While they have not said if there are specific reasons for the shortage, there are a few hypotheses that can be made.

Could there be a problem with the electronics? After taking a look at the components inside the Nintendo Wii after it was released, there was nothing revolutionary or advanced found within. But, then, producing a high-end solution was not Nintendo's intent. The company focused more on the game-play aspect to deliver a revolutionary interface, and has been very successful at their efforts. Almost all of the components could, and likely do, have second sources to ensure there are no shortages. For example, the console that Semiconductor Insights investigated contained Qimonda DRAM, but it is very possible another company, such as Micron, is poised to provide the component to meet demand, if required.

The only semiconductor devices that Nintendo could have trouble second-sourcing would be the custom-made Hollywood CPU and Broadway graphics processor, fabbed by IBM. But why would these devices be in short supply? These parts use older process technology and are not nearly as advanced as something like the Cell processor driving the PS3, which should ensure high yields leading to an increase in the number of die produced per wafer.

At the same time, both the Xbox 360 and PS3 have migrated to a 65-nanometer process CPU. This helps to increase the number of components they can create and reduces cost, but likely has a lower yield, possibly limiting the number available, especially since these parts have only been in production for a few months and have not reached full production maturity; but neither Sony nor Microsoft seems to be having problems getting their systems on the shelf. As Nintendo has not taken this route, it is unlikely it is suffering shortages on this end.

Aside from the electronics, what else could cause shortages? There are many other factors that make up the console, including packaging and assembly. When it comes to packaging, it can be much more costly to create a second source or to quickly ramp up production. Take the outer shell of the console, for example. A plant creates these shells and is limited in how many can be created based on the number of molds provided. It is not a simple or cheap process to create a new set of molds in order to increase the number of shells produced, and the plant may not have the capacity to generate more shells even if it received additional molds.

In addition, second- sourcing could lead to slight variations that could deter the brand that Nintendo has created. What if the white is a few shades off? This might seem like a small detail, but companies and consumers take this very seriously. Look at the Apple iPod white. When so much is riding on building a brand, the aesthetics must be perfect.

As well, what if Nintendo spends the money to increase capacity (if this is indeed the issue), finds out six months later that it is creating more than it can sell, and starts incurring inventory carrying costs? The success of the Wii has been unexpected and unprecedented, and many analysts do not think it will maintain momentum in coming years.

Of course, it could all just be marketing. But possibly not. According to George Harrison, Nintendo of America's marketing chief, Nintendo is currently producing 1.8 million Wiis per month. Recall that market research firm The NPD Group (Port Washington, N.Y.) has stated that Nintendo sold just under 4 million consoles in the United States over the past 10 months. That averages out to almost 400,000 per month. That leaves only 1.4 million per month for all other regions. Nintendo will want to make sure that there are more systems available in the regions where there is high-enough demand to sell out, which could mean they will supply more to the U.S. market.

Nintendo of America just released information that it sold 650,000 Wii consoles in the first two weeks of November alone. If similar buying behavior continues throughout the holiday season, it's easy to see that there will not be enough consoles for everyone.

Gregory A. Quirk is an analyst at Semiconductor Insights, a CMP company.